Patti Combs says she sleeps better since she swapped her traditional mortgage for a reverse mortgage two months ago.
"It's a tremendous relief," she said. "Each month I had to dig into my savings in order to pay the mortgage. When that well ran dry, I would have been a candidate for foreclosure or had to sell my beloved home at a depressed price."
Now she doesn't have to worry about the monthly payment, which was $2,800 just for principal and interest. She won't have to pay back a dime until she moves out of her waterfront home in Treasure Island.
Combs, 79, is one of thousands of homeowners riding a new wave of interest in reverse mortgages, which are available only to people 62 or older.
FHA-insured reverse mortgages, which represent the vast majority of those issued, jumped 26 percent last year, to a record 108,287 loans. That's in no small part because the number of active reverse mortgage lenders more than doubled to 1,674.
Reverse mortgage lending has barely made a dent in the potential market, reaching about 1 percent of older households. That makes older homeowners and their $4-trillion of untapped equity a very alluring target for lenders and brokers.
"It has a lot to do with the fact that the traditional mortgage business has dried up," said Chris Tomaras, president of Mortgage Trust Co., a Sarasota lender that's been offering reverse mortgages since 1991. "The sales people are now jumping over to the reverse mortgage side of the business with a different mentality. They're pressuring seniors to do these things whether or not the need is there."
In California, there have been several instances of brokers persuading homeowners to take out reverse mortgages and use the proceeds to buy annuities and insurance policies. That means more commissions for the broker, but fees on the products plus the interest accruing on the mortgage mean the costs vastly outweigh the benefits. A more widespread concern is that because reverse mortgages are highly complicated products, they are easily misrepresented by inexperienced or unscrupulous sales agents.
A reverse mortgage makes the most sense for homeowners who are in their 70s or older, who have substantial equity in their homes, who plan to stay in their homes for many more years and who need the money. The older you are and the more equity you have in your home, the more money you can get through a reverse mortgage. Any existing mortgage has to be paid off as part of the transaction.
Reverse mortgages can be taken out as a lump sum, which is how Combs' deal was structured, as a line of credit to be used as needed or as a regular monthly payment. Fannie Mae even has a reverse mortgage program you can use to buy a home, although a substantial down payment is required.
A major drawback of reverse mortgages is the high fees up front, which make them a very expensive proposition for someone who stays in the home only a few years after taking one out. It's not unusual to pay $8,000 to $12,000 in fees on a modest loan. Combs found a great deal on her jumbo mortgage, paying $8,140 in closing costs to borrow $409,190. However, Tomaras said she would face closing costs of $17,107 and would not be allowed to borrow quite as much if she were closing her loan today.
Many lenders, including Bank of America, which lent the money to Combs, have scaled back their business in large private loans because they can't sell them in the secondary market without FHA insurance. Investors have lost their appetite for asset-backed securities, at least temporarily.
Bank of America, which jumped into reverse mortgages in a big way last year, does about 90 percent of that business in FHA-insured loans. Those loans are limited to $222,300 in the Tampa Bay area, although a bill proposed in Congress would more than double that.
"I expect reverse mortgages in the future to be a mainstream product," said Bob Szarek, Bank of America's southeast regional executive for reverse mortgages. He said the bank has deployed 75 reverse mortgage loan officers in Florida and three other southeastern states.
Combs, who has a business selling party supplies online, said she's glad she took the plunge when she did. "This house means so much to me," she said. "I just can't imagine living anywhere else."
Helen Huntley can be reached at email@example.com or (727) 893-8230.